Greece Has Defaulted – Which Country In Europe Is Next?

Well, it is official. The restructuring deal between Greece and private investors has been pushed through and the International Swaps and Derivatives Association has ruled that this is a credit event which will trigger credit-default swap contracts. The ISDA is saying that there are approximately $3.2 billion in credit-default swap contracts on Greek debt outstanding, and most analysts expect that the global financial system will be able to absorb these losses. But still, 3.2 billion dollars is nothing to scoff at, and some of these financial institutions that wrote a lot of these contracts on Greek debt are going to be hurting. This deal with private investors may have “rescued” Greece for the moment, but the consequences of this deal are going to be felt for years to come. For example, now that Greece has gotten a sweet “haircut” from private investors, politicians in Portugal, Italy, Spain and other European nations are going to wonder why they shouldn’t get some “debt forgiveness” too. Also, private investors are almost certainly going to be less likely to want to loan money to European nations from now on. If they will be required to take a massive haircuts at some point, then why in the world would they want to lend huge amounts of money to European governments at super low interest rates? It simply does not make sense. Now that Greece has defaulted, the whole game is going to change. This is just the beginning.

The “restructuring deal” was approved by approximately 84 percent of all Greek bondholders, but the key to triggering the payouts on the credit-default swaps was the fact that Greece decided to activate the “collective action clauses” which had been retroactively inserted into these bonds. These collective action clauses force most of the rest of the bondholders to go along with this restructuring deal.

A recent article by Ambrose Evans-Pritchard explained why so many people were upset about these “collective action clauses”….